The issuance of interest-free credit from a government-controlled and fully owned central bank. These interest free but repayable loans would be used for public infrastructure and productive private investment. This proposal seeks to overcome the charge that debt-free money would cause inflation.[10][11][12]

Common targets for reform

Fractional Reserve Banking

Fractional-reserve banking describes systems in which banks lendmoney while at the same time guaranteeing that depositors (whose money it is lending) will be able to make withdrawals on demand. Because the bank extends a loan with money from depositors, while at the same time guaranteeing the deposits already held by the bank, this system has the effect of increasing the economy's money supply.[19] Some consider this practice both inflationary and fraudulent.[20][14]

Many attempts at financial reform have been made to try to mitigate against the potentially damaging effects of fractional reserve banking - for example, those made in response to the Great Depression and the crash of 1929. These reforms included the creation of deposit insurance (such as the Federal Deposit Insurance Corporation) to mitigate against the danger of bank runs.[21] Some countries have also implemented legal reserve requirements, which impose minimum cash reserve requirements on banks.[22] Mainstream economists believe[21] that these monetary reforms have made sudden disruptions in the banking system less frequent.

Some critics of fractional reserve banking (such as members of the Austrian school) argue that the practice is inherently "fraudulent" and is an act of theft perpetrated against depositors/savers.[23][14] In their view, fractional reserve banking artificially lowers real interest rates, destabilizes the money supply and contributes to volatile and wasteful business cycles (or "credit cycles").[24] Other critics, such as Michael Rowbotham, equate the practice with counterfeiting, where government-protected privileged private entities (the banks) are granted the legal right to create money "out of the nothing" while also being granted the right to charge interest on their creation.[14] Michael Rowbotham argues that this concentrates wealth in the banking sector (which has a "cannibalizing" effect on the rest of the economy), causes the rest of the populace to slowly sink into debt slavery, creates volatile hyperinflation in the housing market and deflation in the consumer goods market, squeezes real wages, destroys farming and agriculture and de-industrializes heavily indebted economies.

Money no longer represents any intrinsic value

Banks loan out money through fractional-reserve banking, resultant money is no longer backed by a tangible asset. Money does not represent anything other than the debt of another; the only "tangible" aspect of the system is the borrower’s promise to pay back the interest and principal on the loan. Debt and the ability of borrowers to service that debt then becomes the underlying currency.[25]

Governments do not supply money. Private banks do, for profit

Many people criticise the fact that governments pay interest for the use of their own money which the central bank creates "out of nothing".[26][27] This leaves the state of a nation's economy susceptible to the interests of private bankers who create the money solely for the purpose of creating ongoing profits for their employees and shareholders, without any other binding social or legal obligations to the broader community (or future generations) that are normally expected from government entities. Either private individuals or corporations borrow to fund themselves and their businesses, or government "borrows" money from the central bank to fund deficit spending.

Impact on developing nations

Some monetary reformers criticise existing global financial institutions like the World Bank and International Monetary Fund and their policies regarding money supply, banks and debt in developing nations, in that they appear to these writers to be "forcing" a regime of extortionate or unpayable debt on weak Third World governments that do not have the capacity to pay the interest on these loans without severely affecting the well-being or even the viability of the local population. The attempt by weak Third World governments to service unrepayable debt with the sale of valuable hard and soft commodities on world markets is seen by some to be destructive of local cultures, destroying local communities and their environment.[10][14][28]

Social Credit and the provision of debt-free money directly from government

Still other radical reform proposals emphasise monetary, tax and capital budget reform which empowers government to direct the economy toward sustainable solutions which are not possible if government spending can only be financed with more government debt from the private banking system. In particular a number of monetary reformers, such as Michael Rowbotham, Stephen Zarlenga and Ellen Hodgson Brown, support the restriction or banning of fractional-reserve banking (characterizing it as an illegitimate banking practice akin to embezzlement) and advocate the replacement of fractional-reserve banking with government-issued debt-free fiat currency issued directly from the Treasury rather than from the quasi-government Federal Reserve. Some monetary reformers have criticized these proposals as a return to PopulistGreenbackerism.[35]

Alternatively, some monetary reformers such as those in the Social Credit movement, support the issuance of repayable interest-free credit from a government-owned central bank to fund infrastructure and sustainable social projects and the simultaneous enforcement of full reserve banking to control the inflationary and destabilizing effects they see in the practice of fractional reserve banking. This Social Credit movement flourished briefly in the early 20th century, but then became marginalized and died out in the post-World War II era. It has recently produced fresh proposals for reform via the American Monetary Institute, which is based in Chicago.[36]

Both these groups (those who advocate the replacement of fractional-reserve banking with debt-free government-issued fiat, and those who support the issuance of repayable interest-free credit from a government-owned central bank) see the provision of interest-free money as a way of freeing the working populace from the bonds of "debt slavery" and facilitating a transformation of the economy away from environmentally damaging consumerism and towards sustainable economic policies and environment-friendly business practices. Many in both groups advocate the outlawing of fractional reserve banking and the enforcement of full reserve banking.[37]

Examples of government issued debt-free money

Some governments have experimented in the past with debt-free government-created money independent of a bank. The American Colonies used the "Colonial Scrip" system prior to the Revolution, much to the praise of Benjamin Franklin. He believed it was the efforts of English bankers to revoke this government-issued money that caused the Revolution.[38]Abraham Lincoln used interest-free money created by the government to help the Union win the American Civil War.[39] He called these 'Greenbacks' "the greatest blessing the people of this republic ever had."[40][41]

Binary economics proposes that central banks issue interest-free loans to the government and for public projects or private capital. They would be administered by the banking system for the spreading of productive capacity and consuming capacity, on market principles, throughout the population.

Return to the market money

A move away from fiat money towards a hard currency or asset-backed currency does not necessarily mean using commodity money such as gold, silver or both in daily transactions. The vast majority of the gold supposedly in reserve is held by the Federal Reserve as collateral for the national debt. The currency could be tied to the good faith and credit of the United States Government, which already issues bonds on the open market, which in turn could be redeemable in gold or silver. Digital means are also now possible to allow trading in hard currencies such as gold, and some believe a new free market will emerge in money production and distribution, as the internet allows renewed decentralisation and competition in this area, eroding the central government's and bankers' old monopoly control of the means of exchange.[43][44] Some monetary reformers believe that in a genuine free market, where government did not impose a monopoly currency on the populace, a gold standard or silver standard monetary system would arise spontaneously out of the free market because of their unique properties: their extraordinary malleability, their strong resistance to forgery, their character as stable and impervious to decay, and their inherently limited supply.[45]